What do ‘New Market Highs’ mean for your portfolio?

If like most people you are enjoying the warm glow of recent stock market highs, and the positive impact they have had on your portfolio, you might also be thinking what ‘goes up surely must come down’. In fact it would be perfectly normal to think that as markets have hit new all-time highs now might be the time to cash out…or at the very least make changes to your portfolio. But would this be wise…?

The good folks at Dimensional (DFA) have provided us with some historical market data that seems to disprove this theory or that the very least calls into question the likelihood that a market crash must immediately follow a surge in stock market returns.

The exhibit below demonstrates that a market index being at an all-time high generally does not necessarily mean that we are heading for a crash…in fact it doesn’t really tell us anything…certainly not enough to indicate that we should take any action.

DFA have taken a look at the MSCI World Index for the better part of the last half century. What the above shows us is that from 1973 through to the end of 2016 the proportion of annual returns that have been positive after a new monthly high is similar to the proportion of annual returns that have been positive after any index level.

In other words a new market high tells us nothing (over this period at any rate) and is certainly not a useful prediction of what future returns might be like. Put simply staying invested and not making changes based on short-term predictions will increase your likelihood of investment success. Sound familiar?